Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots Podcast.
Speaker 2: I'm Joe Wisenthal.
Speaker 3: And I'm Tracy Alloway.
Speaker 2: Tracy, I guess one good thing about market crow, I
Speaker 2: don't know if it's even good because I like when
Speaker 2: lines go up no matter what. But you know, people
Speaker 2: always say, oh, this can't go on forever, and they're
Speaker 2: talking about some specific trend or here's a scam or
Speaker 2: here's a bezel in the economy that will exist as
Speaker 2: long as the lines that go up. Things get revealed
Speaker 2: in a downturn, Things that were unsustainable are shown to
Speaker 2: definitively be unsustainable when the downturn hits.
Speaker 3: Right, what's that old buffet quote when you don't see
Speaker 3: who's swimming naked until the tide starts to go out.
Speaker 3: And I think, I think we are probably at that moment.
Speaker 3: And I got to say, in terms of who likes
Speaker 3: when lines go down, you know who likes when lines
Speaker 3: go down? Yeah, short sellars.
Speaker 2: That's right, they definitely do. Especially what it's been like
Speaker 2: fifteen years since the line has gone down, and so
Speaker 2: many short sellers have had such a brutal time. Maybe
Speaker 2: we'll put swimming naked in the headline of this.
Speaker 3: Instead of a dead body is floating to the top.
Speaker 2: Maybe it's a little we'll have to figure out. Anyway,
Speaker 2: let's just jump right to it. We've had him on
Speaker 2: the show in the past, someone we always enjoy talking to.
Speaker 2: He is going to tell us about what bodies are
Speaker 2: going to float to the service, and those bodies happen
Speaker 2: to be naked too. He's gonna tell us what naked
Speaker 2: bodies are floating to the service. Jim Chaeno is founder
Speaker 2: of chenos In Company, longtime investor, short seller. Thank you
Speaker 2: for coming back on odd Lots.
Speaker 4: No, thanks for having me. It's my pleasure.
Speaker 2: I only recently learned that Scott Bessen. I say recently learned,
Speaker 2: as if I looked this up. I heard it from
Speaker 2: you as you were walking into the studio. He worked
Speaker 2: for you.
Speaker 4: Yeah, he was my first analyst.
Speaker 2: Incredible.
Speaker 4: I taught him everything he knew up to a point,
Speaker 4: I guess to a point.
Speaker 3: Okay, all right, I'm just going to ask basic questions
Speaker 3: to start. But what has the past week or so.
Speaker 3: Let's see, we're recording this on April ninth at eight am. Yeah,
Speaker 3: we have to be that specific on the time now
Speaker 3: because things change so quickly. What has the past week
Speaker 3: been like for you?
Speaker 4: Well, we're not in the business of running outside money anymore,
Speaker 4: so that ended a couple of years ago, but we
Speaker 4: do advise clients and of course run our own money.
Speaker 4: So since nineteen ninety six we've always been hedged. But
Speaker 4: we've seen obviously substantial alpha in the last couple of weeks. Ie,
Speaker 4: the stuff we're short has gone down much more than
Speaker 4: the market. We tend to be long in the market passively,
Speaker 4: and that usually happens right when the market shifts gears.
Speaker 4: A lot of the more questionable story stocks, frauds, hypes
Speaker 4: begin to underperform. And that was not the case until
Speaker 4: really about the tariff, the Liberation day, and now it's
Speaker 4: really kicked in.
Speaker 2: If I'm a equity, if I'm an asset allocator, is
Speaker 2: that why I allocate to someone who specializes in short selling,
Speaker 2: Not because they are going to give me positive returns
Speaker 2: a month after month after month, but that it allows
Speaker 2: me to be more comfortably long risk assets in my
Speaker 2: other investments because I have this knowledge that I'll get
Speaker 2: outside return outside returns from you when they go down.
Speaker 4: Yeah, in our business model over forty forty years. Basically
Speaker 4: it morphed into the idea that fundamental shorts allow you
Speaker 4: to be more long. Yeah, and that's really at the
Speaker 4: end of the day, your shorts are financing your long portfolio.
Speaker 4: If your shorts don't go up or go down, enables
Speaker 4: you to have a long portfolio that actually will outperform. Yeah.
Speaker 3: I mean, it is true that before this month, being
Speaker 3: a short seller did not seem that fun for like
Speaker 3: the past ten years, and we've done episodes on the
Speaker 3: hard life of being a short seller. Are the games
Speaker 3: now enough to offset like a decade of lines going up?
Speaker 4: Well, again, the lines are going up. But it was
Speaker 4: all a matter of if you're selling insurance as I
Speaker 4: was and advised people do do now, the idea is
Speaker 4: the insurance working, and the insurance was working really for
Speaker 4: even post global financial crisis for quite a while, and
Speaker 4: then starting about twenty eighteen, twenty nineteen, and right into
Speaker 4: the Game Stop episode in the first quarter of twenty
Speaker 4: twenty one, it didn't work at all. But it has
Speaker 4: worked since Game Stop and even though the market's made
Speaker 4: new highs, you know, recently, I think is January, the
Speaker 4: short site has not been too bad. I mean, Bloomberg
Speaker 4: has an index the most shorted basket, which you can
Speaker 4: take a look at if you're a Bloomberg subscriber. Thank
Speaker 4: you for the plug, my pleasure, and it has it
Speaker 4: has done relatively well relative to the market since since
Speaker 4: early twenty twenty one.
Speaker 2: Let's talk about some areas of the market. Let's just
Speaker 2: jump right into it. I think actually the last time
Speaker 2: we had you on I'm looking at this was FTX
Speaker 2: November or was it it wastually That's.
Speaker 3: Right, it was actually before FTX imploded officially, but after
Speaker 3: we did the infamous box episode.
Speaker 2: But you know what, the last time we talked to
Speaker 2: was November twenty third, twenty twenty two, right as FTX
Speaker 2: was uploading. But there's just another point in the history
Speaker 2: here that's important. November thirty of twenty twenty two was
Speaker 2: when chaed GPT came out, and then we got this
Speaker 2: incredible AI wave and people started piling everything into Nvidia
Speaker 2: and all these data center plays, et cetera. And in
Speaker 2: previous odd lads, and I don't remember what that was.
Speaker 2: You've talked about data centers before. In some brutal data
Speaker 2: center economics are terrible. One of the things that we've
Speaker 2: seen in this downturn. See I'm putting this all together.
Speaker 2: This is not totally incoherent. One of the things that
Speaker 2: we've seen in this downturn is some really like sharp
Speaker 2: reversals for the big AI plays that were baked. Those
Speaker 2: were just so hot. And so I'm curious now, like
Speaker 2: you know, you've talked about data centers, et cetera, tell
Speaker 2: us where you're seeing some of this stuff right now.
Speaker 4: So the AI bet is an uncertain bet. We don't
Speaker 4: know what the returns on this massive investment is going
Speaker 4: to be yet, and even the mag seven will tell you, yeah,
Speaker 4: well it's uncertain. We think it's going to be worth
Speaker 4: the risk, but it's an uncertain payot and I'll leave
Speaker 4: that up to people who are much more well versed
Speaker 4: in technology than I am. Our view was that the
Speaker 4: old legacy data centers that were built to basically handle
Speaker 4: the cloud, not AI. We're in trouble and we're a
Speaker 4: bad business to begin with. It have gotten only worse.
Speaker 4: And that was that was the bet. It's still the bet.
Speaker 4: I think it's a really I've called it one of
Speaker 4: the worst business models I've ever seen. Because the cap
Speaker 4: x is enormous. You've got to keep replacing the air
Speaker 4: conditionings and the racks and the networking equipment and to
Speaker 4: keep these centers running, and the returns on capital are
Speaker 4: just abysmally low. So we kind of said, oh, right,
Speaker 4: AI is a thing. It's an uncertain thing. Market loved it.
Speaker 4: Now market's questioning it. But we do know that the
Speaker 4: old data centers, the ones that have been around now
Speaker 4: twenty years, yeah, Equinas to Digital Realty, Digital Bridge, those
Speaker 4: have really challenged business models.
Speaker 3: So one of the things that happened recently is Core
Speaker 3: We've did its IPO and it had initially targeted two
Speaker 3: point seven billion and it came in at one point
Speaker 3: five five billion. And the interesting thing to me is
Speaker 3: part of that was a really big order from in Vidia,
Speaker 3: and in Vidia is very interwoven with Core weaves model.
Speaker 3: Since we're already talking about floating bodies and people swimming naked,
Speaker 3: I'm going to try to be as distasteful as I can,
Speaker 3: but how incestuous is the relationship between Core Weave and Nvidia.
Speaker 4: So for those of us that are a little bit
Speaker 4: older than you two, I mean, we remember some of
Speaker 4: the round tripping that was going on in telecom equipment
Speaker 4: back in nineteen ninety two thousand, with Nortel and Lucent
Speaker 4: providing financing for its customers and then selling things into
Speaker 4: those customers on cheap terms, and the whole thing unwound
Speaker 4: very quickly when the dot com bubble and telecom bubble imploded.
Speaker 4: I put a tweet out that got some notice where
Speaker 4: I saw it in Nvidia not only was doing the
Speaker 4: core weave kind of just but had just bought a
Speaker 4: distributor there, and that that was also a little worrisome. Now,
Speaker 4: it's only a small part of their business, it's not material.
Speaker 4: But when you start to see this stuff on the margin,
Speaker 4: where the companies are increasingly round tripping with their customers,
Speaker 4: or financing their customers, or buying in their inventory via distributors,
Speaker 4: you begin to wonder. You know, if it's just on
Speaker 4: the margin, that's fine. But as we all know, on
Speaker 4: the margin is everything right. If you miss your earnings
Speaker 4: by a couple of pennies, your stock can be devastated.
Speaker 4: And if they're doing deals like this to basically, you know,
Speaker 4: make sure they make or beat numbers, you know, then
Speaker 4: we have the old We have the old nineteen ninety eight,
Speaker 4: ninety nine, two thousand, dynamic at work where companies are
Speaker 4: stretching to make numbers. That has not been the case
Speaker 4: up until now. Right through twenty twenty three, twenty twenty four,
Speaker 4: demand's been amazing. Yeah, blowout numbers, but it's something to
Speaker 4: keep an eye on at the shift.
Speaker 2: So in other words, like the insinuation here is not
Speaker 2: that there's something like per se bad, but history says
Speaker 2: that when you see stuff like this, to keep the.
Speaker 4: Real aggressively aggressive aggressive moves with your customers and your distributed.
Speaker 2: Because that's what everyone's been wondering, right, And I guess
Speaker 2: like all of this stuff with the trade turmoil has
Speaker 2: like like we actually it's kind of amazing because I
Speaker 2: think we've gone two weeks without talking about AI, which
Speaker 2: may something maybe it's something that we could be a
Speaker 2: little bit thankful for in some sense. But we're the
Speaker 2: trade trade war to go away tomorrow. Yeah, and we
Speaker 2: were returned to what we were talking about in January.
Speaker 4: I saw your post earlier today about if tariffs run
Speaker 4: away like this and all the other stuff that is
Speaker 4: suddenly should.
Speaker 2: Be a concern.
Speaker 4: Yeah. I look on the margin again, on the margin
Speaker 4: I think these numbers are not material that they're deal
Speaker 4: with Core Week the distributor their bought, but it's something
Speaker 4: to keep an eye.
Speaker 2: On, Tracy, I just want to do, by the way,
Speaker 2: some of these names are just for listeners digital realties below.
Speaker 2: Where it was like at its twenty twenty peak, after
Speaker 2: having plunged from about one ninety five to one thirty three,
Speaker 2: named Cornweave was actually just slightly above its IPO price
Speaker 2: of forty That was a czy day. It's anging in
Speaker 2: the the said forty one thirty five right now. So anyway,
Speaker 2: So one.
Speaker 3: Of the things that happened in the early two thousands
Speaker 3: with the telecoms and Internet bubble is I think people
Speaker 3: a lot of people expected some of these companies to fail,
Speaker 3: but I guess the bet was maybe a handful of
Speaker 3: them would be huge winners from the development of the Internet.
Speaker 3: And it's true. You know, we have like Google come
Speaker 3: out of this. If you invested in Amazon, you made
Speaker 3: a lot of money. Is there any possibility of that
Speaker 3: happening when it comes to AI. Do you see a winner?
Speaker 4: Oh? I mean, I think there's going to be a
Speaker 4: lot of winners if it's as revolutionary as a technology
Speaker 4: as it appears to be, we'll see all kinds of
Speaker 4: new business models and probably a company that we might know,
Speaker 4: like in video where ever succeeding, or maybe a couple
Speaker 4: of companies we don't know yet that we'll take advantage
Speaker 4: of it. The flip side to be the glass half
Speaker 4: empty guy, is that what everyone also forgets about the
Speaker 4: Internet was that it destroyed as many businesses as it
Speaker 4: brought forward, you know, and any business that was in
Speaker 4: the analog business that went digital, so you actually had
Speaker 4: a physical product that went digital was absolutely devastated, like
Speaker 4: Kodak or Blockbuster Video or the Yellow Pages, what have you.
Speaker 4: And I suspect that AI will be very similar. We'll
Speaker 4: see just you know you're a hater. No, No, I'm
Speaker 4: open minded about it. I think if it really is
Speaker 4: an amazing technology, and I think it just you're going
Speaker 4: to have to see both sides of the coin for
Speaker 4: capitalism with it. It'll probably it'll probably devastate a number
Speaker 4: of business models as well.
Speaker 3: What's the path to bundetization for these AI companies, because
Speaker 3: you already pointed out the cost of capital is really high.
Speaker 4: Uh, I don't know, and that's we still haven't seen
Speaker 4: the the aha moment as we did with the Internet,
Speaker 4: with with online retailing and communities like America Online where
Speaker 4: suddenly you know your aunt was on it, and then
Speaker 4: getting email money and paying money, paying money for it
Speaker 4: and getting emails.
Speaker 3: And you have mail.
Speaker 2: Let's pivot because you have been fond over the years
Speaker 2: to talk about this sort of myth that private equity
Speaker 2: is something more than just adding leverage to companies and
Speaker 2: that there's this perceived stability. Yeah, it's very nice. You
Speaker 2: don't have to look at your marks every day that
Speaker 2: it really is just leverage. And you know, I'm looking
Speaker 2: at a share price. The shares of like Apollo, for example,
Speaker 2: I guess maybe the Good Credit that was at one
Speaker 2: eighty nine thirty on December ninth, that's at one oh nine.
Speaker 2: Blackstone shares look pretty similar. We're talking like forty percent
Speaker 2: declined air that was at two hundred. It's at one
Speaker 2: eighteen right now. That's belower it was in late twenty
Speaker 2: twenty one. Private assets are like the story that Tracy
Speaker 2: and I keep coming back to. What is your takeaway
Speaker 2: from this, like really intense selling of these names.
Speaker 4: Yeah, I mean, I'm a little surprised at how intense
Speaker 4: the selling has been so quickly. But look, I mean,
Speaker 4: I agree with with the cliff Asnas who's done a
Speaker 4: great job talking about this. This is volatility laundering, and
Speaker 4: the idea that these funds don't have the same risks
Speaker 4: as equity funds have is to me preposterous. You're buying
Speaker 4: businesses on leverage, and we're now seeing that as it's
Speaker 4: becoming increasingly hard for these deals, for them to bring
Speaker 4: these deals public or get exits. And again on the margin,
Speaker 4: you're seeing a little bit of odd behavior some of
Speaker 4: the private equity funds in trying to entice their investors
Speaker 4: to stick around. We'll have to see. I mean, up
Speaker 4: until now, for the last fifteen years, getting back to
Speaker 4: the beginning of our conversation, sell offs have been relatively
Speaker 4: short and sharp. So if you held off on marking
Speaker 4: your portfolio down, you generally were rewarded by not having
Speaker 4: to take the mark right. The markets kept going, and
Speaker 4: the nightmare scenario for private equity and arguably private credit
Speaker 4: will be a long period of lackluster or no equity
Speaker 4: returns with higher interest rates.
Speaker 2: Can you actually just when you said, oh, at the margins,
Speaker 2: we're starting to see some jinky behavior with regards to
Speaker 2: their partner LPs. You what's going on.
Speaker 4: There was a story I think on Bloomberg just yesterday
Speaker 4: or the day before where one of the funds was
Speaker 4: asking investors if they wanted to sell their LP investment
Speaker 4: in one of the funds or transfer it, they had
Speaker 4: to get permission from the GP. In order to get permission,
Speaker 4: they had agree to put money into the next one.
Speaker 4: And that story caught my eye, And so you know
Speaker 4: when you start to see that, And now we're starting
Speaker 4: to see time series of fun performance that are starting
Speaker 4: to become more lackluster right rolling ten year returns and
Speaker 4: private equity are beginning to converge with that of the
Speaker 4: regular equity market.
Speaker 3: To your point about the length of the selloff, I mean,
Speaker 3: we've established that one of the competitive advantages of doing
Speaker 3: private credit versus public is you're not forced to take
Speaker 3: the marked market losses so soon you can hold on
Speaker 3: for longer. Theoretically, we're seeing a lot of people right
Speaker 3: now talk about, you know, emergency moves from the Fed,
Speaker 3: maybe a cut sooner than the market had expected a
Speaker 3: week or two ago. Do interest rates matter for private
Speaker 3: credit at the moment? How much of a buffer for
Speaker 3: what lower rates actually provide.
Speaker 4: Here. Well, I think spreads matter, okay, so and we've
Speaker 4: seen we've seen them widening out of credit spreads. So
Speaker 4: I think that one of the reasons people think the
Speaker 4: FED is going to ease is because of that right weakness,
Speaker 4: not not because of low inflation. And so you're seeing
Speaker 4: a relatively very quick increase in credit spreads over the
Speaker 4: past two weeks. I mean, it's really moved. So I
Speaker 4: don't think that that that's the panacea that people are expecting,
Speaker 4: at least not yet. Even with a FED ease, because
Speaker 4: junk credit is rates are going up.
Speaker 2: Right, they could the FED could do something just about
Speaker 2: like the sheer mechanical breakdown. If it's happening the plumbing,
Speaker 2: the plumbing people love to talk about the plumbing of
Speaker 2: the treasury market.
Speaker 4: The base is straight. I read something. I read something
Speaker 4: today about the basis.
Speaker 3: Thank you, thank you for reading.
Speaker 2: Listen, pause right there, listeners. Jim Chandos is a reader
Speaker 2: of the Odd Launch newsletter, which means you should be
Speaker 2: to what is it What does a GP of a
Speaker 2: private fund do when the IPO window is slammed shut
Speaker 2: when there really is not a lot of M and A.
Speaker 2: So basically very few opportunities for liquidity or distribution or
Speaker 2: anything like that. What kind of move do they make?
Speaker 4: You? Better? Better practice your writing of a heartfelt apology
Speaker 4: letters to your LPs, because the IRRs you've been telling
Speaker 4: them that the fund has been getting prior to its
Speaker 4: wind up are going to turn out to be way
Speaker 4: overstated to the actual returns. So look, it's it's problematic.
Speaker 4: I mean, investors are going to get back stakes in
Speaker 4: private companies that they might not want. Oh so distributions
Speaker 4: in kind, yeah, exactly, and so if you can't cash
Speaker 4: out and so yeah, I think it's going to be
Speaker 4: problematic for a number of funds. I mean, I'm sure
Speaker 4: there'll be plenty that'll do fine. But the days of saying, well,
Speaker 4: I'm going to earn fourteen fifteen percent with very little volatility,
Speaker 4: so this is a free lunch, I think are over.
Speaker 3: The other narrative that pops up from time to time
Speaker 3: is this idea of dry powder. There are a bunch
Speaker 3: of funds out there who have been holding cash for
Speaker 3: a long time, just waiting to snap up distressed assets
Speaker 3: once everything finally crashes. Is that real?
Speaker 4: I don't know. I mean, you have to get into
Speaker 4: the sort of weeds of every specific fund, but I mean,
Speaker 4: if they've been holding cash for years and years and years,
Speaker 4: they certainly weren't earning that fourteen and fifteen percent investors
Speaker 4: were hoping for. So I don't know, I don't know
Speaker 4: how the accounting works on that, but I'm sure. Look,
Speaker 4: there is some unused capacity in the private equity world.
Speaker 4: But on the other hand, that doesn't get you your returns.
Speaker 4: You know, buying companies and adding value to them is
Speaker 4: where the returns are. So if there were funds and
Speaker 4: firms holding dry powder and asset prices get marked down
Speaker 4: a lot, that should be good thing for them.
Speaker 2: It just seems I mean, the issue to me, and
Speaker 2: I've sort of talked about this in various ways, is
Speaker 2: that for the last fifteen years, you're a dummy if
Speaker 2: you had dry powder, right the market has told you
Speaker 2: over and over again, right like, So this is why
Speaker 2: I'm always kind of skeptical that there could even possibly
Speaker 2: be much And it's interesting, you know, look like we're
Speaker 2: like two weeks into or no, it's been a week
Speaker 2: since Liberation Day, but you go a few weeks before
Speaker 2: that obviously the weakness started picking up, and now we're
Speaker 2: seeing you know, we've seen this sort of dislocation and treasuries.
Speaker 2: It seems like if you have fifteen years of people
Speaker 2: telling you you're a moron for holding, for being under levered, Yeah,
Speaker 2: then a downturn in just sort of normal investments can
Speaker 2: metastasize into financial problems very quickly.
Speaker 4: Well, it also depends, tracy, how you define dry powder.
Speaker 4: A lot of firms defined dry powder as the ability
Speaker 4: to capital call on their limiteds. It's not actually cash
Speaker 4: sitting in a bank acount. Yeah. Yeah, and I think
Speaker 4: that will become much more problematic in a downturn.
Speaker 2: I've got to pick up the phone.
Speaker 4: Yeah yeah, look, yeah, so.
Speaker 3: You're primarily a markets guy, but you are no stranger
Speaker 3: to Macro. Talk to us a little bit about I
Speaker 3: guess the relationship between what we're seeing in markets and
Speaker 3: the real economy right now.
Speaker 4: Yeah, I mean, the transmission mechanism via tariffs will happen
Speaker 4: pretty quickly, I think. I mean, you saw Walmart warn today,
Speaker 4: Delta has pulled their guidance. Both of those were just today.
Speaker 4: I mean, it's kind of stunning. How if you think
Speaker 4: about the nuts and bolts of these tariffs and how
Speaker 4: they work. Despite what our president says, the importing entity
Speaker 4: pays the tariff, right, it's not a tax on China.
Speaker 4: And so you're a small and medium businessman. You just
Speaker 4: got one hundred thousand dollars worth a product that landed
Speaker 4: at Long Beach Port from China, and your broker is saying, yeah,
Speaker 4: just come down with a cashiers check for one hundred
Speaker 4: thousand dollars for the governments and will release your product.
Speaker 4: Businesses don't have that, yeah, And so I mean there's
Speaker 4: practical aspects these tariffs that I don't think we kind
Speaker 4: of know all the implifications and how it will ripple
Speaker 4: through the economy. And I suspect you'll start by May
Speaker 4: getting some pretty decent real time feedback on from businesses saying,
Speaker 4: you know, we're cutting out profit guidance because if they
Speaker 4: can't pass it on completely, and study after study shows
Speaker 4: they can't, usually then profit margins, which, by the way,
Speaker 4: let us not forget all right, all time highs are
Speaker 4: going to hit an air pocket.
Speaker 3: We have seen some companies pulling their forward guidance already, right.
Speaker 2: Jack, Yeah, Delta, Delta this morning, Walmart, Walmart when their
Speaker 2: chart came out. When Donald Trump pulled out the chart
Speaker 2: on Liberation Day and the market immediately tanked. The view
Speaker 2: from a lot of people is like, if people actually
Speaker 2: understood the size of what's what these numbers are, the
Speaker 2: market would be a down lot more. Do you stands?
Speaker 2: And again, anything could happen by the time there's but
Speaker 2: on April ninth that there is still an element of
Speaker 2: disbelief that this could actually be where our turn.
Speaker 4: Oh. I think there definitely is a level of disbelief.
Speaker 4: I mean the stock market is still twenty times latest
Speaker 4: twelve month earnings, and I mean they're coming down, but
Speaker 4: people still think earnings are going to be up ten
Speaker 4: percent this year. And I don't know what planet they're on,
Speaker 4: and so I think that that that's number one. And
Speaker 4: the size of the tariffs was stunning. I remember it
Speaker 4: was watching the press conference after the market closed, and
Speaker 4: I don't have the best eyest in the world. I
Speaker 4: had to get close to the TV to make sure.
Speaker 2: Reading the numbers show was that fifty or five percent?
Speaker 4: Yeah?
Speaker 3: Yeah, I mean that says a lot like the idea
Speaker 3: that it could be fifty or five percent at all
Speaker 3: is pretty nuts. The point you were making about profit margins,
Speaker 3: I think is really important, and a lot of the
Speaker 3: macro impact of the tariffs depends on how corporations actually
Speaker 3: react to the tariffs. Do they choose to absorb the
Speaker 3: additional costs themselves or do they pass it on to customers.
Speaker 3: What's your sense of flexibility there? And then more generally,
Speaker 3: where do you see inflation going from here? Because obviously
Speaker 3: there is tension between prices going up in the immediate
Speaker 3: term because of the tariffs and demand being destroyed and
Speaker 3: US getting deflation.
Speaker 4: I think Walmart's warning this morning was maybe instructional in
Speaker 4: that they went out of their way to say that
Speaker 4: they were pulling their profit guidance, I believe, but told
Speaker 4: people that their revenue growth guidance was still intact for
Speaker 4: this year, which seems to me to imply that they're
Speaker 4: not going to pass on these tariffs since they get
Speaker 4: so much other stuff from China, right eat it, They're
Speaker 4: going to eat it, and because otherwise they would say, well,
Speaker 4: we're going to hike prices fifteen twenty percent and our
Speaker 4: revenue is going to be up fifteen to twenty percent.
Speaker 4: They didn't say that, they said three to four percent,
Speaker 4: but margins. You know, we don't know on margins yet. Yeah.
Speaker 2: I think this is really important because I think if
Speaker 2: you were to go back six months ago, before the election,
Speaker 2: so much of the TERRORFF conversation was this very simple
Speaker 2: minded what does it mean for inflation in the FED?
Speaker 2: And now the sort of deeper question of like, are
Speaker 2: you uniquecapping corporate profitability in America and what does that
Speaker 2: mean for all these different I.
Speaker 4: Think that's the bigger risk that inflation.
Speaker 3: If you remember the past few years, the reason we
Speaker 3: had record corporate profits was because companies were able to
Speaker 3: pass on inflation to customers. The whole price over volume
Speaker 3: idea that we've been talking about.
Speaker 2: Let's talk about a guy, uh Elon Musk. For many years,
Speaker 2: you were famously the BFF, your BFF, Elon Musk. We
Speaker 2: did an episode recently with Nick Denton, founder of Gawker Media,
Speaker 2: and he said he said, he said, the fall of
Speaker 2: Elon Musk is a story that a new journalist should
Speaker 2: come out of retirement for it may be the biggest
Speaker 2: story of our lives. He's been pronounced, you know, done
Speaker 2: dead many times, and Tesla is always is this different
Speaker 2: this time? In your view, I don't look.
Speaker 4: I mean, he's tied himself to the administration in a
Speaker 4: way that is frankly kind of to me amazing and
Speaker 4: shocking at the same time. So he is tied tied
Speaker 4: now politically, you know, in a way that he never was.
Speaker 4: That's number one. But to me, Tesla is beyond Elon Musk.
Speaker 4: Tesla is a real sort of benchmark stock for me
Speaker 4: because of the way in which Elon effortlessly sells the
Speaker 4: story of the future to investors. And I've always said,
Speaker 4: I've always said that in bull markets, people put a
Speaker 4: premium on promises, and in bear markets, they put a
Speaker 4: discount on reality. And this is a stock that's still
Speaker 4: there's a handful of others that's still traded, you know,
Speaker 4: forty fifty times revenues, where people still believe, they still
Speaker 4: believe in the promise of robotics and AI and robotaxis.
Speaker 4: And he's captured the imagination of a whole set of investors,
Speaker 4: particularly retail investors, who just are rabid with the idea
Speaker 4: that this is the company of the future. And so
Speaker 4: that's number one. Number two, I mean, ultimately he's going
Speaker 4: to have to deliver on these promises, and because you
Speaker 4: know what the car business he's got right now, ain't
Speaker 4: all that Margins are imploding, profits are down now for
Speaker 4: three or four years in a row. He's going to
Speaker 4: have down, I think down sales this year in terms
Speaker 4: of units. So I remember when the es is where
Speaker 4: we're all going to be driving Tesla's in twenty thirty, right,
Speaker 4: that's not happening. And so it'll be curious to see
Speaker 4: when the robotaxis are rolled out this summer in Austin.
Speaker 4: How exciting is that? And then of course you know
Speaker 4: the big one is we're all going to have you knows,
Speaker 4: Rosie the robot from the Jets in our house doing
Speaker 4: our tasks from Tesla. And again, I being the skeptic,
Speaker 4: I think I don't see the robotics, the humanoid robotics
Speaker 4: market being a whole lot different from the car market. Right,
Speaker 4: it's utility. People will have one. It'll be thirty to
Speaker 4: fifty thousand dollars, there'll be fifteen companies making them, and
Speaker 4: margins will be it'll be a manufacturing margin business. You know,
Speaker 4: cars have tons of software and them tons of chips
Speaker 4: in them. They're amazing utility for the consumer, but they're cars.
Speaker 4: They have a low margin and a lot of people
Speaker 4: make them, and I think it's going to be the
Speaker 4: same with robotics.
Speaker 3: I always wonder how much rope the tech believers are
Speaker 3: giving companies to fulfill their promises. And I remember I
Speaker 3: asked Kathy Wood about this, like what is her time
Speaker 3: frame for actually making a profit. Because there's a premium
Speaker 3: on good stories. You can keep selling a good story
Speaker 3: for a pretty long time and a certain set of
Speaker 3: investors will believe it. What's the catalyst for that actually
Speaker 3: starting to change?
Speaker 4: Well again, I mean I think that the number one,
Speaker 4: interest rates have a big determined on those kinds of stories,
Speaker 4: because if we believe at least some of the rudiments
Speaker 4: of finance, you're willing to you're willing to pay more
Speaker 4: for profits and cash flow ten years in the future
Speaker 4: than when rates are higher. That's number one. And for
Speaker 4: all these companies like this, ninety five percent of the
Speaker 4: value is in the terminal value. That's number one. Number two,
Speaker 4: it's look, it's castles in the sky. I mean in
Speaker 4: bull markets. People believe these stories and that's as old
Speaker 4: as human nature. And when things get get tight, I
Speaker 4: mean we kind of forget Tesla was one hundred dollars
Speaker 4: a couple of years ago, down from five hundred, and
Speaker 4: it dropped eighty percent in twenty twenty two. It varies.
Speaker 2: Twenty twenty two feels like a long time ago. All right,
Speaker 2: I want to talk about ELON, but from a different
Speaker 2: angle for a second. When DOGE was announced, yeah, people
Speaker 2: didn't really know what it was, and then like it
Speaker 2: sort of start over. Once it started going, it looked like, oh,
Speaker 2: these cuts like have these moves have not seem to
Speaker 2: have any rhyme or reason other than decapping the federal government.
Speaker 2: And a lot of guys are like, look, I'm all
Speaker 2: in favor of cutting waste, but I'm not so sure
Speaker 2: about this anyway. I was probably one of those guys.
Speaker 2: I'll cop to it. But we did an episode a
Speaker 2: while back with this professor at Boston University on Medicare fraud,
Speaker 2: and I thought to myself, Okay, if there's one area
Speaker 2: that maybe some of these cracked data scientists could go
Speaker 2: into and find some evidence and really like make some
Speaker 2: efficiencies and so forth, this would be Medicare. However, this
Speaker 2: week I saw a headline that says health insurers cheer
Speaker 2: increase of Medicare advantage payments. I don't know what Medicare
Speaker 2: advantages yet. I know I'm supposed to look this up.
Speaker 2: Health insurers that offer Medicare advantage plants. The seniors cheered
Speaker 2: a Trump administration's decision announced Monday to increase federal reimbursement
Speaker 2: rates by twenty five billion dollars next year. What's medicure?
Speaker 2: This is in the Albanion Times Union. What is Medicare advantage?
Speaker 2: Why are they cheering this?
Speaker 4: You're asking the old guy, right, Yeah.
Speaker 2: No, No, I think it's because you know about these
Speaker 2: companies very well. And what does it say that the
Speaker 2: reimbursement rates came in so much higher than expecting? Joe?
Speaker 3: If you if you watch cable news, you would know
Speaker 3: all about Medicare advent.
Speaker 4: Yes, yes you would. So I tweeted out when Doge
Speaker 4: started out, I said, if they don't go after Medicare advantage,
Speaker 4: you know right away then you know they're not that serious, Okay,
Speaker 4: And so that kind of tells you where I'm coming
Speaker 4: out on this. Medicare advantage has been just a windfall
Speaker 4: for the insurers. It's it's basically for people that are
Speaker 4: eligible for Medicare. It's supplemental, and it's also all it
Speaker 4: can be all inclusive, meaning that you you you have
Speaker 4: a carrier treat you for not only that which Medicare covers,
Speaker 4: but but additional things. The problem becomes it's what we
Speaker 4: call upcoding, and that's where the fraud has occurred because
Speaker 4: the government has will give Medicare advantage carriers a tiered
Speaker 4: set of payments depending on how sick their patient is
Speaker 4: coming into the program. So, you know, I could be
Speaker 4: relatively healthy. I don't know how they're going to code
Speaker 4: me when they go to the government for their reimbursement
Speaker 4: to say, mister chaenhas is very sick and blah blah
Speaker 4: blah blah. So we get, you know, X thousand dollars
Speaker 4: from him per year as opposed to y thousand dollars
Speaker 4: for him per year. And that's that's a big problem.
Speaker 4: There were some public companies that were purely in Medicare
Speaker 4: advantage that we were short, and a lot of them
Speaker 4: were bought up by companies like CBS and others, and
Speaker 4: we just couldn't believe it because if you did any
Speaker 4: kind of due diligence on these companies, you realize that
Speaker 4: they were they were upcoding.
Speaker 2: I guess implicitly, if you're shorting them, that's a bet
Speaker 2: that someone takes this issue seriously in the public sector.
Speaker 2: And it looks like at least here's a guy who
Speaker 2: came into cut spending and he now we're.
Speaker 4: Yeah, I mean they're going they're going after the small stuff,
Speaker 4: they're going after the I'm a bear on DOGE. I
Speaker 4: mean they they they're going after the political stuff. They're
Speaker 4: going after this ridiculous thing from two weeks ago about
Speaker 4: the number of Social Security numbers going to you know,
Speaker 4: illegals and and things like that. This is all political
Speaker 4: theater and and the real the real cuts are are
Speaker 4: in areas that that they haven't touched. And so we'll
Speaker 4: have to see. But it didn't get past me. That
Speaker 4: Musk basically now is all but saying he's going to
Speaker 4: be gone from DOGE in May. You know, he four
Speaker 4: months and so and Vivic never got going. And so
Speaker 4: I think that that this is they're finding out that
Speaker 4: what they thought was fraud in ways, it's turning out
Speaker 4: to be, you know, authorized programs that you might not
Speaker 4: agree with politically, but we're authorized, right and and and
Speaker 4: need legislative prescriptions. So I think they're not even going
Speaker 4: to come close to their target of a trillion dollars
Speaker 4: and two trillion dollars. I think that's just pipe dreams.
Speaker 3: I completely forgot about Vivek, but you're right he did.
Speaker 4: Yeah, yeah, he didn't didn't even get to day one.
Speaker 4: Yeah yeah, Jim.
Speaker 3: Hopefully you won't mind me asking this question, but I
Speaker 3: think it's fair to say you are a financial markets veteran.
Speaker 3: You've seen, You've seen a lot of stuff happen over
Speaker 3: the years. Are there any historical parallels or analogies to
Speaker 3: our current moment in time?
Speaker 4: No, I mean, given what's driving markets as we sit here,
Speaker 4: I don't think we've ever seen anything like this where
Speaker 4: where a global hedgemond has willingly said I'm going to
Speaker 4: basically shoot myself in the foot and get rid of
Speaker 4: the exorbitive privilege that we've had as being the global
Speaker 4: hedgemon with the reserve currency. They're trying to dismantle that
Speaker 4: as we speak, and I think that just has all
Speaker 4: kinds of impacts that none of us have lived through.
Speaker 4: So we'll have to see unless it gets reversed. And
Speaker 4: so I don't know what the you know what the
Speaker 4: analog for this is we're just gonna have to let
Speaker 4: everybody else take it day by day. But you know,
Speaker 4: the idea that that that markets are now going to
Speaker 4: react to you know, tweets, and as as someone I
Speaker 4: follow said, you know, this is still a vibes market,
Speaker 4: not a math market, and and and that as it
Speaker 4: relates to the equities, And I think that's well said.
Speaker 4: I think that that this stuff just goes back and forth,
Speaker 4: and I think that's kind of no way to run
Speaker 4: an economy and no way to run markets.
Speaker 2: That was a great place to leave, But I'm gonna
Speaker 2: go end on like a more boring question on the
Speaker 2: medicare advantage stuff.
Speaker 4: Yeah, and all these.
Speaker 2: People can come in here and talk to us about
Speaker 2: upcoading and a fraud. Where did in your view when
Speaker 2: you've looked into this and why these companies end up
Speaker 2: getting bought out in the short stonn't work. Where is
Speaker 2: the force coming from that prevents whether it's the you know,
Speaker 2: HHS or whatever, from actually taking.
Speaker 4: There, So there's actually there's actually arms of the government.
Speaker 2: This isn't like none of this was like new. Why
Speaker 2: why does it in your view? Does it not get addressed?
Speaker 4: I don't know. And you know, I've called this the
Speaker 4: Golden Age of fraud, and and you know, it just
Speaker 4: seems that that we have a willingness in the corporate
Speaker 4: sector and elsewhere, and in the nexus of government and
Speaker 4: corporate of just not holding people to account for this
Speaker 4: stuff in the white collar crime area. And and I
Speaker 4: think medicare is is just a wonderful example of that
Speaker 4: in the in the our budget, the federal budget. And
Speaker 4: so the fact that that they haven't even gone after
Speaker 4: this or addressed this yet for DOGE is really telling
Speaker 4: to me, because it's there. It's it's low hanging fruit.
Speaker 4: And you know, if you look at the if you
Speaker 4: look at the ten k's of these companies that we
Speaker 4: were short, I mean there's there's criminal investigation after state
Speaker 4: level investigation listed in their legal proceedings, and yet most
Speaker 4: of them, when they get caught, they pay a fine
Speaker 4: and nobody goes to jail. And it's so disgusting.
Speaker 2: Even if they reversed as trade tradery, there's so much rot.
Speaker 2: I'm so angry right now. Jim Chandos, thank you so much.
Speaker 2: This was a very satisfying episode. I found this very fun.
Speaker 3: Thank you for coming in therapeutic.
Speaker 4: My pleasure.
Speaker 2: Thank you for coming on oblains my pleasure, Tracy. I
Speaker 2: love talking to Jim.
Speaker 3: Yes, although that was bleak and I had.
Speaker 2: To say, you know what, you know what, Yeah, it's bleak,
Speaker 2: and but Jim knows ball and I enjoy talking to
Speaker 2: a ball nowhere like Jim.
Speaker 3: I have to say for our listeners, I rarely see
Speaker 3: Joe in a bad mood, and he is actually in
Speaker 3: a bad mood this morning. Usually Joe has to put
Speaker 3: up with me being cranky.
Speaker 2: And yeah, did we switch this week?
Speaker 3: Yeah? I think we switched. No, but I mean it's bad.
Speaker 3: I feel bad too, And it is just crazy to
Speaker 3: think that one man could end it all with just
Speaker 3: a simple announcement or even like some words of comfort
Speaker 3: and indication.
Speaker 4: Cool, be cool.
Speaker 2: And unfortunately, when I hear the words term be cool,
Speaker 2: I just think of the scene in pulp fiction everybody
Speaker 2: be cool. I'm not going to say the rest. Yeah,
Speaker 2: he said be cool. It didn't work.
Speaker 3: Yeah, And if only he did something or said something
Speaker 3: at the very least, we could all go back to
Speaker 3: worrying to your point about AI and yeah, stuff like that.
Speaker 2: Yeah, shall we leave it there, Let's leave it there.
Speaker 3: This has been another episode of the Odd Thoughts podcast.
Speaker 3: I'm Tracy Alloway. You can follow me at Tracy al.
Speaker 2: And I'm Jill Wisenthal. You can follow me at The Stalwart.
Speaker 2: Follow our guest Jim Chanos, He's at Real Jim Chanos.
Speaker 2: Follow our producers Carmen Rodriguez at Carmen armand dash Ol
Speaker 2: Bennett at dashbot In, Kale Brooks at Kale Brooks. More
Speaker 2: odd Lots content, go to Bloomberg dot com slash odd Lots,
Speaker 2: where we have our daily newsletter and all of our episodes,
Speaker 2: and you can chat about these topics twenty four to
Speaker 2: seven in our discord Discord dot gg slash od Lots.
Speaker 3: And if you enjoy odd Lots, if you like it
Speaker 3: when we talk to veteran investors like Jim Chanos, then
Speaker 3: please leave us a positive review on your favorite podcast platform.
Speaker 3: And remember, if you are a Bloomberg subscriber, you can
Speaker 3: listen to all of our episodes absolutely add free. All
Speaker 3: you need to do is find the Bloomberg channel on
Speaker 3: Apple Podcasts and follow the instructions there. Thanks for listening,
Speaker 3: Benea